On February 18, President Barack Obama announced a new Homeowner Affordability and Stability Plan that aims to reduce avoidable residential foreclosures. Although complete eligibility details will be announced on March 4 when the program begins, certain preliminary information is currently available.
First, a “Refinancing Plan” will allow homeowners with conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to obtain low-cost refinancing through those institutions into 15- or 30-year fixed rate mortgage loans. In order to qualify, the loan-to-value of the new first mortgage (including refinancing costs) may not exceed 105%, and the homeowner must have sufficient income to make the new payments and have an acceptable mortgage payment history. For homeowners with second liens, the second-lien holder’s consent will be required.
Second, a “Homeowner Stability Initiative” will assist borrowers who are at risk of default and foreclosure by providing incentives to mortgage lenders to modify first mortgages. In general, eligible borrowers must (i) occupy the property as a primary residence, (ii) have monthly mortgage payments that exceed 31% of their monthly gross income, and (iii) have loans with balances that do not exceed current conforming loan limits. Lenders choosing to participate must first reduce the loan interest rate so that the borrower’s monthly payment does not exceed 38% of the borrower’s monthly income,and then the government will match further interest reductions dollar-for-dollar to reduce the ratio to 31%. Certain up-front and ongoing incentive payments will be made to servicers, borrowers and mortgage holders. Finally, the Treasury Department will create an up to $10 billion insurance fund to provide insurance payments linked to declines in the home price index to holders of modified mortgages.
The plan also involves (i) the development by the Treasury Department of uniform guidelines for loan modifications, to be applied by all financial institutions receiving Financial Stability Plan funds, Fannie Mae, Freddie Mac and many other federal government agencies; (ii) support for “cramdown legislation” to allow bankruptcy judges to modify home mortgages that have balances below current conforming home limits; (iii) modifications to the existing Hope for Homeowners refinancing program; and (iv) increases to the Treasury’s Preferred Stock Purchase Agreements with respect to Fannie Mae and Freddie Mac from $100 billion each to $200 billion each, and increases to the size of Fannie Mae’s and Freddie Mac’s retained mortgage portfolios by $50 billion to $900 billion.